Managerial Extrapolation: Who and When?

44 Pages Posted: 26 Jul 2021

See all articles by Dayong Huang

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Lijun (Gillian) Lei

University of North Carolina at Greensboro

Mengmeng Wang

University of North Carolina (UNC) at Greensboro

Yuhang Xing

Rice University

Date Written: July 10, 2021

Abstract

We show strong over-extrapolation of earnings in the I/B/E/S managerial guidance. Firms whose earnings are less persistent, less volatile, or more salient exhibit more extrapolation. Managers who observe rapid growth in their local housing market also demonstrate more extrapolation, albeit weaker. Over-extrapolation is not particularly related to a manager’s skills or tenure. Exploiting exogenous variations in firms’ profitability resulting from the 2017 Tax Cuts and Jobs Act, we provide clean evidence that managers over-extrapolate past earnings even when earnings experience a temporary shock. Consistent with Bordalo et al. (2020) and Afrouzi et al. (2021), our findings shed light on what factors affect the degree of over-extrapolation.

Keywords: Guidance, Extrapolation, Over-extrapolation, Earnings

JEL Classification: G12, E44, Q43

Suggested Citation

Huang, Dayong and Lei, Lijun and Wang, Mengmeng and Xing, Yuhang, Managerial Extrapolation: Who and When? (July 10, 2021). Available at SSRN: https://ssrn.com/abstract=3884059 or http://dx.doi.org/10.2139/ssrn.3884059

Dayong Huang (Contact Author)

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

HOME PAGE: http://sites.google.com/a/uncg.edu/dayong-huang/

Lijun Lei

University of North Carolina at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

Mengmeng Wang

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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